- 74 -
842(b) accomplishes this in a rational manner using substantially
the same methodology that has been in the Code for over 35 years.
The majority also finds that section 842(b) is not
consistent with article VII, paragraph (5) of the Treaty. This
provision of the Treaty requires that the same method be used to
attribute business profits in each year, unless there is good and
sufficient reason to the contrary. The Model Commentary to this
provision explains that its purpose is to assure an enterprise
with a permanent establishment in another state, continuous and
consistent tax treatment in the interest of providing some degree
of certainty. Section 842(b), as did its predecessors, applies
consistently to each taxable period by requiring foreign
insurance companies to report at least a minimum amount of
effectively connected net investment income.
Finally, it has been suggested that the minimum effectively
connected income formula of section 842(b) "creates" income even
if the foreign company has earned no overall profit during a
given taxable year. It is argued that this could go beyond the
"allocation" of the foreign company's profits permitted by
article VII, paragraph 1 of the Treaty. This was clearly not the
purpose of section 842(b). As stated in the conference report,
H. Conf. Rept. 100-495, supra, 1987-3 C.B. at 264, Congress
intended that the Secretary issue regulations "to mitigate the
effects of any increase in tax resulting from the fact that a
taxpayer's deemed income from U.S.-connected investments exceeds
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